Corporate social responsibility and directors’ duty to act for the success of the company

Posted on by Christi Perou

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Corporate social responsibility (CSR) is a controversial notion associated with the responsibility of companies for their externalities to society. It is a highly controversial notion since there is no agreed definition. CSR’s definition depends on the lens someone is approaching it. For instance, corporate lawyers tend to associate CSR with directors’ fiduciary duties. Economists might refer to CSR as a waste of money and completely irrelevant to companies; consider the well-known Friedman doctrine. Developed by the economist Milton Friedman and stated that ‘[t]he social responsibility of a company is to increase profits.’ Lastly, a businessperson might consider CSR as part of the company’s marketing department.

Section 172 (s172) of the Companies Act 2006 is one of the most important and controversial sections introduced. Even though there is no statute explicitly mentioning ‘CSR’ it has been argued that s172 might imply or mirror CSR. S172 is associated with the directors’ duty to act for the success of the company, and it sets out the scene for directors on how to perform their duty.

My dissertation examined whether s172 paves the way for consideration of CSR in corporate management and concluded that s172 might mirror CSR however, this is unclear since the meaning of both is ambiguous.

First, my dissertation analysed the meaning of CSR and how it is defined by identifying three definitions and some of their characteristics. CSR might be defined as ethical, strategic, and marketing strategy. Ethical CSR refers to companies addressing their externalities voluntarily without motivation for shareholder return in the long-term or because of reputational motives. Externalities refer to actions by companies causing harm to stakeholders, like environmental pollution and employees’ exploitation. Stakeholders, as I have concluded, are the cornerstone of CSR and refer to everyone affected directly and indirectly by the operation of a company. Even though there is no accepted definition for stakeholders, they include but are not limited to, the customers, the consumers, the shareholders, the environment, and the community.

Strategic CSR refers to the practice that companies are engaging in CSR activities to increase shareholder wealth in the long-term. The dissertation identified that long-term focus is a key element of strategic CSR and that if there are no returns for shareholders in the long-term then the company will not engage in CSR activities. It has been argued that CSR is related to corporate financial performance (CFP) and that is why companies are engaging in CSR activities. This type of CSR, in comparison to ethical CSR, is not voluntary. Companies are not engaging in CSR activities because of ethical motives for the protection of stakeholders. They are CSR conscious since they will profit from this. The motive for engagement with strategic CSR is shareholder wealth maximization in the long-term.

The last type of CSR considered in my dissertation is CSR as a marketing strategy. This type of CSR is used by companies as part of their marketing department to maintain a high standard reputation. Companies are promoting that they are CSR conscious without being so. It is important to note at this point that legally, companies are not compelled to engage in CSR activities, and thus, promoting that they are CSR conscious without being so is not contrary to the law. CSR as a marketing strategy is not related to actual engagement in CSR activities, like the other types of CSR examined. The only motivation for the promotion of the so-called engagement in CSR activities is the maintenance of reputation.

Chapter two analysed s172 as to its potential connection to CSR. Directors’ duty to act for the success of the company pre-2006 was a fiduciary duty found in common law. However, the approach as to what constituted the company’s success adopted by the common law was opaque. The predominant approach was that the success of the company meant that the director should act for its best interests, and the company’s best interests, in most cases, were those of shareholders. On the other hand, some particular cases ruled in favour of stakeholders’ interests as associated with the company’s best interests, and that is why the pre-2006 approach to the company’s success was unclear. Directors did not know if they were acting within their duty to promote the success of the company if they were promoting shareholders’ or stakeholders’ interests.

S172 was introduced to provide clarity as to what constitutes the company’s success. At first blush, s172 seemed to introduce a new approach to the interpretation of the company’s best interests since directors are required to consider stakeholders’ interests in their decision-making process. Stakeholders, by the introduction of s172, are not left out of the scene and the director must ‘have regard to’ their interests. This was deemed as a novel approach to the predominant approach to the company’s success adopted pre-2006. However, shareholders’ interests are still prioritised. Stakeholders’ interests have not been enhanced by the introduction of s172. The relevant provision reflects that stakeholders’ interests are to be considered by the director as long as they promote shareholders’ interests. In case shareholders’ interests are not provided then the director can ignore stakeholders’ interests without being in breach of duty. This approach to stakeholders’ interests has been argued to be contrary to ethical CSR since the latter provides that shareholders’ interests are not paramount.

Lastly, chapter two dealt with s172’s interpretation post-2006 and two issues have been identified: enforceability and vagueness. Vagueness was analysed as to s172’s meaning since there was no detailed judicial interpretation about the provision since it came into force. It has been argued that if s172’s meaning is unclear then it is unclear whether it is endeavouring to mirror CSR. Enforceability was analysed in relation to stakeholders’ position. Stakeholders do not have the right to enforce s172 indicating that their position has not been enhanced by the introduction of s172 contrary to ethical CSR.

In the last chapter, I endeavoured to analyse the connection, if any, between CSR and s172. It has been identified that s172 might mirror ethical CSR since directors can consider the interests of various stakeholders without limitations. Also, s172 has some characteristics relevant to strategic CSR and CSR as a marketing strategy which might imply their connection. S172’s relation to strategic CSR is apparent from the fact that stakeholders’ interests will be considered as long as shareholders are benefited. The provision for the consideration of reputation in s172 is relevant to CSR as a marketing strategy since the most important characteristic of the latter is reputation. However, it was argued that since stakeholders’ interests are subordinated to those of shareholders, ethical CSR is not mirrored in s172.

I have concluded that it is hard to tell whether s172 paves the way for the consideration of CSR in corporate management since the meaning of both is opaque. It depends on which approach is adopted whether CSR is mirrored by s172.

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